The monthly survey of senior executives of more than 400 companies highlighted the main concerns and challenges faced by Iranian business owners in the fourth month of the current Iranian year (June 22-July 22).
The survey was conducted by the Statistics and Economic Analysis Center of Iran Chamber of Commerce, Industries, Mines and Agriculture.
The findings were part of the Purchasing Managers’ Index (locally known by its Farsi acronym Shamekh) report released by ICCIMA on a monthly basis.
PMI is an indicator of economic health for manufacturing and services sectors. It provides information about current business conditions to companies’ decision-makers, analysts and purchasing managers.
Decline in Purchasing Power Lowers Demand
The sharp decline in customer’s purchasing power, especially those of food and clothing, has decreased demand for the products of these industries.
Latest data released by the Statistical Center of Iran about inflation show the general goods and services Consumer Price Index (using the Iranian year to March 2017 as the base year) stood at 504.3 in the fourth month of the current Iranian year (June 22-July 22) to register a record high of 54% compared with the similar period of last year.
The highest year-on-year inflation was registered for “food and beverages” with 87% while “communications” saw the lowest YOY rate of 10.8%.
The month-on-month and annualized inflation stood at 4.6% and 40.5% respectively.
SCI put the annualized inflation for urban and rural areas at 40% and 43.2%, respectively.
The year-on-year inflation stood at 52.8% for urban areas and 60.7% for rural areas in the month.
With a coefficient of 26.64%, the CPI for food and beverages stood at 780.2 in the month to July 22, indicating a 5.7% increase from the previous month. The index registered a YOY increase of 87% and the CPI of the group increased by 55.1% in the 12-month period to July 22 YOY.
The rise in prices of goods and services accelerated at an unprecedented pace after the government decided to overhaul the import subsidy system.
The government move saw the abolition of the controversial practice of allocating cheap dollars at the rate of 42,000 rials per dollar, locally known as the Preferential Foreign Currency, to import essential goods, including corn, soymeal, unprocessed oil, oilseeds and barley, in addition to wheat, flour and medicine.
The market value of the dollar is above 300,000 rials now.
“Until now, we have been paying to producers [read importers] but now the subsidies go to consumers. In fact, the Preferential Foreign Currency has not been ceased, rather the allocation method has changed,” President Ebrahim Raisi said in a televised speech on the eve of the introduction of the move in May.
In his speech, Raisi emphasized that the removal of cheap dollar allocation will not lead to a price rise in wheat, flour and medicine. However, the move has led to dramatic rise in the prices of essential goods. In fact, the prices of all commodities and services have also risen suddenly in a ripple effect.
Also known as necessity or basic goods, essential goods are products consumers will buy, regardless of changes in income levels.
Export Earning Repatriation, Dearth of Working Capital
The survey’s respondents find the law mandating exporters to repatriate their earnings a major hurdle in their works.
In fact, the law obliges exporters to sell their earnings in foreign currencies to the government at rates lower than market prices. In turn, the government uses the cheap currency it earns from exporters to import essential goods.
Business owners have for long called on the government to repeal this regulation.
Many producers are struggling with shortage of working capital as on the one hand, the government fails to pay its debt and on the other, the banking system does not adequately allocate loans to shore up struggling enterprises.
Companies are facing an intense shortage of financial resources and the downsizing of their workforce.
Power Cuts
Power outages have forced many companies to work at a fraction of their capacity, as some production lines have been shut down.
Rasoul Khalifeh-Soltani, the head of Iran Steel Producers Association, recently called for changing electricity supply restrictions imposed on steel plants in a letter to the Ministry of Industries, Mining and Trade.
“In the fiscal 2021-22, Iranian steel industry fell short of its target output by 6 million tons, inflicting a loss of $4 billion; restrictions levied on energy supply and power outages were the main reasons behind that loss,” he said.
In the summer of last fiscal year (July 23-Sept. 22, 2021), steel production declined by 40% compared with the previous quarter (March 21-June 22) due to electricity cuts amid record high domestic consumption.
In a letter to the Supreme National Security Council, ISPA put steel mills’ losses due to power outages at $6 billion from the beginning of last Iranian year (March 21) to Sept. 12.
According to ISPA, 82 days of production were lost during the period due to power outages and 300,000 direct and indirect jobs were lost or restricted, the news portal of the association reported.
Summer demand led to a severe power and water shortage in summer in most regions, resulting in blackouts and dry taps.
The new record came as high temperatures nationwide drove general electricity consumption to new heights in summer, prompting authorities to prioritize domestic users over industries in supplying power.
As the manufacture of steel and cement is an energy-intensive process, their factories were restricted by the Iran Power Generation, Distribution and Transmission Company (locally known as Tavanir) and have been only allowed to work at a fraction of their demand during specified hours.
According to the World Steel Association, Iranian steel mills produced a total of 28.5 million tons of crude steel in 2021, registering a 1.8% decline compared with 2020.
Despite the decline in output, Iran maintained its global status as the world’s 10th biggest crude steelmaker.
In winter, the Oil Ministry and the National Iranian Gas Company put pressure on steelmakers and mining firms last year to drastically cut their gas consumption in winter.
Specifically, Chadormalu Mining and Industrial Company was asked to keep its gas consumption below 30,000 cubic meters per day. Since the quota was less than 1% of the heavyweight mining firm’s gas consumption under normal conditions, the restriction practically meant cessation of production in Chadormalu, inflicting huge losses in lost production.
Certain companies were restricted for longer periods, while others were less affected.
Producers of direct-reduced iron were the prime target of the restrictions due to their energy-intensive nature. Since DRI is considered a strategic and key product in the steel industry, the measure impacted the entire steel production chain and led to a decline in output of steel products and rising prices in the market.
With the decline in temperature across Iran, gas consumption in households set a record high last winter.
“Policymakers were expected to adopt measures to avoid the repeat of last year’s blackouts, but the directives issued by electricity authority imply otherwise. As such, almost all steel mills, especially those run by the private sector, will be closed for three months,” Khalifeh-Soltani was also quoted as saying by Mehr News Agency.
Bahram Sobhani, the head of the board at Iran’s Steel Producers Association, had earlier voiced his concerns in a letter to Minister of Industries, Mining and Trade Reza Fatemi-Amin.
“Iran’s steel industries have managed to make the country the world’s 10th biggest producer, despite all the restrictions and sanctions. Last year, the industry suffered losses due to gas and electricity shortage but did not for once think twice about cooperating with the government. Now that we have the opportunity to compensate part of these losses, we do not expect the government to step in the way and use the situation to its own benefit,” he said.
Other Problems
The shortage of some raw materials, especially those needed by rubber and plastic industries, which are produced by petrochemical industries, has led to the closure of downstream industries and production lines.
Due to price increase in raw materials, a large number of customers from the public sector fail to pay their debts.
Meanwhile, housing recession has affected the market of non-metal minerals and imports have also reduced domestic demand for local ceramic industries.
New data released by the Statistical Center of Iran show 8,685 residential properties were sold during the fourth month of the current fiscal year (June 22-July 22) in Tehran down from 14,083 in the preceding month.
The Central Bank of Iran says 10,294 homes were sold in the capital city during the month, registering a 25.6% decline compared to the previous month.
The general price index of construction materials for residential properties in Tehran, using 2011 as the base year, grew by 44.8% during the four-quarter period ending June 21, which marks the end of the first quarter of the current Iranian year, compared with the previous year's corresponding period.
The index stood at 1,544.2 in Q1 (March 21-June 21), according to the Statistical Center of Iran's latest report published on its website. Compared with the previous quarter, which ended on March 20, the index saw a 10.5% decline.
The index rose by 43.4% in Q1 compared with last year's corresponding quarter (year-on-year).
Compared with the previous quarter, the category of “cement, sand, gravel” registered the highest growth among all categories of construction materials with a growth of 55.8%. “Stone” recorded the lowest index growth with 10.9% compared with the preceding quarter.
“Glass” witnessed the highest year-on-year inflation with 92.1% while “ironware, rebar, profile for doors, windows and fences” category registered the lowest year-on-year price growth with 18.2%.
The highest annual price hike was registered for “glass” group with 86.3% and the lowest annual growth was posted by “ironware, rebar, profile for doors, windows and fences” group with 18.2%.
The Statistical Center of Iran also recently published its findings on the number of permits issued for building construction in Tehran and throughout the country during the fourth quarter of last fiscal year that ended on March 20.
A total of 1,489 permits were issued by Tehran Municipality in Q4, indicating a 24.3% increase compared with the quarter before but a 17.6% decline compared with the same quarter of the year before.
A total of 11,540 homes are expected to be built as a result of the permits issued in Q4. The number indicates a 22% growth quarter-on-quarter but a 13.5% decline year-on-year.
The average number of residential units per permit in the capital city was 7.8.
In Tehran, the total floor area of units in buildings with permits issued in Q4 stood at 2,236,000 square meters, registering a 19.5% increase QOQ but a 5% decline YOY.
The average floor area of units per permit in the capital city was at 1,502 square meters.
Nationwide, municipalities across the country issued a total of 36,993 building permits in Q4, registering a 40.2% increase QOQ but a 23.4% decline YOY.
A total of 115,450 housing units are expected to be built as a result of the permits issued across Iran’s urban areas, indicating a 39.6% increase QOQ but a 15.8% decline YOY.
The average number of residential units per permit across the country was 3.1.
Across the country, the total floor area of units built with building permits was at 21,542,000 square meters, posting a 35.9% increase QOQ but an 18.5% decline YOY.
The average floor area of units per permit was 582 square meters.
The survey respondents also said summer holidays and Muharram (the first month of the lunar Islamic calendar) commemorations have also played a role in production decline.
The Purchasing Managers' Index for Iran’s overall economy settled at 50.1 during June 21-July 22 from 54.73 registered in the previous month, indicating a 4.63-point or 8.46% decline.
Likewise, PMI for the industrial sector settled at 53.93 from 59.65 in the preceding month (May 22-June 21), indicating a 9.59% fall.
"Vehicles and related parts" posted the highest PMI with a reading of 58.5 while “clothing and leather” registered the lowest PMI of 42.5.
